VIX is a measure of the expected variance of the S&P 500 index. If the price is expected to move around a lot, call and put options are more expensive, and so VIX tracks that and goes up.

What happened is this: a bunch of people realized that the actual volatility is generally lower than what people expect, so there's a bunch of "free" money to be made shorting volatility. So billions of dollars ended up flowing in to inverse VIX products, which sold a bunch of options on the S&P 500, making it cheaper to hedge against future price moves.

One structural problem with this trade is that when VIX goes up, the inverse VIX funds go down in value, causing them to buy back the options contracts they wrote short in order to manage their exposure to further VIX increases. This blew up one of the inverse VIX funds - it had a value of $99 on February 5th, and a value of $7.35 on February 6th.

It was basically a short squeeze, except on this weird volatility product. Now that the volatility shorts are out, hedging against volatility is more expensive. That's all there is.

As an afterward, "50 Cent" - an options trader known for buying VIX call options at about 50 cents each - made $200 million dollars off this bet.

Thanks, so where this index gets its assets from exactly?
Also why it was shutdown?

There are no assets.

The value of a options, call or put, is time, the interest rate, "monnieness", and volility. We can see 3 of the 4 inputs. Volility can be figured out from the other 3. So you run S&P 500 options through the formula and out pops it's volility or VIX.

You can do this for any asset that has a option on it. There are other fear indications for the 10 year Treasury, for example. You can do it with other markets as well.

I am with Jack on this one, Triceratops. While it is a high quality index it is not an index that I would recommend anybody investing in. In the end it is a derivative so it is a zero sum game.

I don't follow. What I posted was not an opinion, it was a fact. Nor am I not "with Jack" on this one. I see no evidence Jack disagrees with this fact; even if he did it would be no matter, as he would simply be incorrect.

P.S. I didn't pick CRSPTM1 at random -- The Vanguard Total Stock Market Index Fund seeks to track the total return of CRSPTM1 I am trying to show the difference between an investment product and an index.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Can I just make a brief reminder that this is the theory section? Explaining what something is in response to a question about what something is, is not advocating any particular strategy or bet based on that explanation.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

VIX is the ticker symbol for the CBOE Volatility Index. It's an index in the sense of being a statistic that's computed from short-term S&P 500 index options (those expiring in the next two months) prices. Higher options prices mean higher VIX level.

Based on how it's derived, it's a useful measure of the implied volatility going forward for the S&P 500 for the next 30 days based on those prices. That is, it's a market-based measure of how volatile the market is likely to be. It is normalized to represent the annualized expected potential range of movement for the S&P 500 to a 68% confidence level. e.g. VIX of 20 implies a 20/sqrt(12) = 5.77% range (+/- 5.77% relative to current value) for the next 30 days with 68% probability. And obviously then a 32% chance of falling outside the range.

Given how volatility pricing works under different scenarios and of course the unpredictability of the future, there are some caveats. Options prices could at any given point be overestimating or underestimating consensus or market-estimated forward volatility. Never mind the fact that realized volatility going forward will of course not be the same as any estimate.

VIX is a measure of the expected variance of the S&P 500 index. If the price is expected to move around a lot, call and put options are more expensive, and so VIX tracks that and goes up.

What happened is this: a bunch of people realized that the actual volatility is generally lower than what people expect, so there's a bunch of "free" money to be made shorting volatility. So billions of dollars ended up flowing in to inverse VIX products, which sold a bunch of options on the S&P 500, making it cheaper to hedge against future price moves.

One structural problem with this trade is that when VIX goes up, the inverse VIX funds go down in value, causing them to buy back the options contracts they wrote short in order to manage their exposure to further VIX increases. This blew up one of the inverse VIX funds - it had a value of $99 on February 5th, and a value of $7.35 on February 6th.

This is not right.

Inverse VIX products (even long VIX products) don't operate in option market of S&P500. They operate in VIX futures (symbol VX) market.
They try to maintain 30 day constant maturity of VX futures. So they constantly buying and selling front month and second month VX futures

"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

I will try to sum up my understanding of VIX. English is my second language, so please pardon the grammatical errors.

VIX, the CBOE Volatility Index, is an index that measures the "expected volatility" in S&P 500 index in upcoming month. In plain words, it is a number that measures the expected change in price of S&P 500 in upcoming 30 days. So if VIX is 10, "the market" expects that S&P 500 will move up or down 10% in next 30 days.

"The market expectation" is a fancy way of saying, what are the prices of S&P500 futures compared to now? A future contract of S&P 500 is an obligation about buying or selling S&P500 stocks on some day in future. A future contract is very similar to an stock option; which is a chance to buy/sell a product at some future date, but the option holder can always change their mind. The future contract is always fullfiled, as in, you have to buy something if you promised to do so. Just like the stock exchange (Nasdaq or Dow), CBOE provides an market for futures. From these future prices and the current prices, you can use a formula to calculate VIX. You can lookup online on Yahoo finance or something to see what current future prices are for next 30 days, and calculate VIX yourself.

Now because wall street is wall street, they have made products that you can trade to speculate on prices of VIX. The ticker VXX tracks the value of VIX itself (that is, VXX should be $10 in value if VIX is 10). If VIX rose from 10 to 12, holding VXX will make you $2. There was also another product, aptly named XIV, which allowed you to bet the opposite. That is, if VIX goes from 12 to 10, XIV will make you $2.

For some unknown market reason, volatility had been historic low in 2017. Usually stock market is quite volatile, and VIX hovers around 20. But of late VIX stayed and stayed and stayed near 10 for an entire year. Since VIX kept falling, XIV kept making people money. XIV made so much money for so many people that everyone and their dog started pouring money in it. Well, I think you can see how this story will end. With recent stock price movement, VIX has shot up to around 50. And hence XIV lost money (that is what it is supposed to do, track opposite of VIX). Lot of people lost their shirts, and here we are. XIV had such a big loss that the company running the fund decided to close it.

The funny thing (or not so funny if you lost money) is that the prospectus of XIV was very clear that the long term value of XIV is zero. Because in long term, there is always a change that VIX could double (say go from 10 to 20). XIV should then lose $10, which makes the total price $0 ($10-$10=$0). So I don't know why people were holding it long term. Perhaps someone else can answer that question.

EDIT: This is a very simplified understanding of how VIX and XIV works. The details are a bit more complicated, but I think my description is approximately correct.

EDIT: Make some corrections as suggested by other board members.

Last edited by galadriel on Tue Feb 13, 2018 8:37 pm, edited 2 times in total.

VIX is a measure of the expected variance of the S&P 500 index. If the price is expected to move around a lot, call and put options are more expensive, and so VIX tracks that and goes up.

What happened is this: a bunch of people realized that the actual volatility is generally lower than what people expect, so there's a bunch of "free" money to be made shorting volatility. So billions of dollars ended up flowing in to inverse VIX products, which sold a bunch of options on the S&P 500, making it cheaper to hedge against future price moves.

One structural problem with this trade is that when VIX goes up, the inverse VIX funds go down in value, causing them to buy back the options contracts they wrote short in order to manage their exposure to further VIX increases. This blew up one of the inverse VIX funds - it had a value of $99 on February 5th, and a value of $7.35 on February 6th.

"The market expectation" is a fancy way of saying, what are the prices of S&P500 futures compared to now? A future contract of S&P 500 is an obligation about buying or selling S&P500 stocks on some day in future. A future contract is very similar to an stock option; which is a chance to buy/sell a product at some future date, but the option holder can always change their mind.

Lot of misunderstandings in this thread.

Future contract is not similar to an stock option. There is tight relationship between cash and future based on dividends and interest rate.

"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

I am with Jack on this one, Triceratops. While it is a high quality index it is not an index that I would recommend anybody investing in. In the end it is a derivative so it is a zero sum game.

I don't follow. What I posted was not an opinion, it was a fact. Nor am I not "with Jack" on this one. I see no evidence Jack disagrees with this fact; even if he did it would be no matter, as he would simply be incorrect.

P.S. I didn't pick CRSPTM1 at random -- The Vanguard Total Stock Market Index Fund seeks to track the total return of CRSPTM1 I am trying to show the difference between an investment product and an index.

I don't mean to offend. Let me try a different angle.

The Boglehead way is to invest in the market basket. Maybe tilt one way or the other, but to invest in economically productive assets. CRSPTM1 is a good example. It tracked economically productive assets that are in the market basket.

I too did not choose CAPE 10 at random. It is a good index that provides infomation about the character of assets within the market basket. But it about the market, not of it. You can't invest directly in the CAPE 10. You can't invest directly in the VIX - it is an abstraction.

There are other great indexes out there. CPI. Treasury - TIPS spread, BBB credit spread. All valuable, none tied to any assets. There are ways to invest in these indexes but I would not recommend that the average investor invest in them. After all, they are outside of the market basket. For every winner there is a loser. It is speculation, maybe hedging, but not investing.

Only thing I have learned is that as a group: 1. We are really bright and well read and 2. None of us seem to be good teachers.

Hope someone can get on here and give the OP a SIMPLE explanation. Here is mine: VIX is basically a measure of the risk of the stock market. Folks (professionals) look at it and get worried when it gets high as they feel it is an indicator the market is about to crash. Obviously, a bit more in depth then that, but that is the simple explanation.

Good luck.

"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle

I am with Jack on this one, Triceratops. While it is a high quality index it is not an index that I would recommend anybody investing in. In the end it is a derivative so it is a zero sum game.

I don't follow. What I posted was not an opinion, it was a fact. Nor am I not "with Jack" on this one. I see no evidence Jack disagrees with this fact; even if he did it would be no matter, as he would simply be incorrect.

P.S. I didn't pick CRSPTM1 at random -- The Vanguard Total Stock Market Index Fund seeks to track the total return of CRSPTM1 I am trying to show the difference between an investment product and an index.

I don't mean to offend. Let me try a different angle.

The Boglehead way is to invest in the market basket. Maybe tilt one way or the other, but to invest in economically productive assets. CRSPTM1 is a good example. It tracked economically productive assets that are in the market basket.

I too did not choose CAPE 10 at random. It is a good index that provides infomation about the character of assets within the market basket. But it about the market, not of it. You can't invest directly in the CAPE 10. You can't invest directly in the VIX - it is an abstraction.

There are other great indexes out there. CPI. Treasury - TIPS spread, BBB credit spread. All valuable, none tied to any assets. There are ways to invest in these indexes but I would not recommend that the average investor invest in them. After all, they are outside of the market basket. For every winner there is a loser. It is speculation, maybe hedging, but not investing.

This all started because someone incorrectly referred to the VIX as a bet, which I corrected to try to minimize confusion:

Now because wall street is wall street, they have made products that you can trade to speculate on prices of VIX. The ticker VXX tracks the value of VIX itself (that is, VXX should be $10 in value if VIX is 10). If VIX rose from 10 to 12, holding VXX will make you $2. There was also another product, aptly named XIV, which allowed you to bet the opposite. That is, if VIX goes from 12 to 10, XIV will make you $2.

For some unknown market reason, volatility had been historic low in 2017. Usually stock market is quite volatile, and VIX hovers around 20. But of late VIX stayed and stayed and stayed near 10 for an entire year. Since VIX kept falling, XIV kept making people money. XIV made so much money for so many people that everyone and their dog started pouring money in it.

The VIX is a mathematical measure of anticipated 30 day volatility constructed using the implied volatilities of a wide range of S&P 500 index options. The CBOE offer VIX options, which have a value based on VIX futures and not the VIX itself. XIV fund providers decided to offer a short volatility product. The providers of XIV sell positions in the front two VIX future contracts, such that the weighted average of the days to expiration equals 30 days. For example, if there are 50 days to expiration for the second month VIX future and 22 days to expiration for the front month VIX future then XIV would be waited 29% second month, 71% front month. They adjust their holdings accordingly daily to maintain a average 30 day to expiry.

Volatility is very volatile such that you can make or lose a lot very quickly. Typically averages around 5 times as volatile as stocks, but generally within 1.5x to 8.5x type ranges, and stocks can be very volatile. See this comparison of XIV as a 5x compared to SPY for instance.

Those that bought XIV over prior years did very well, over the last 7 years for instance the yearly price gains included +155%, +107%, +81%, +187%, with relatively small changes in the other three years. Such rewards however come with the risk that some years will see -100% losses, which was the case for XIV more recently. Shares dropped a lot quickly and volatility spiked upwards and XIV was like holding a 8x long stock type holding i.e. lost a lot.

Not much different to flipping a coin, double or quits. The way to play such is to bet no more than say 5%, perhaps with the other 95% in bonds earning 5% i.e. has a place for some as a longer term holding, and/or can be used to short term speculate/hedge positions.

Those that lost their shirts did so because they were no different to going into a casino and making a large bet on red or black on the roulette table. Some even borrowed money to make such a play. Those are the idiots however who like to gamble. More generally and used sensibly and such leveraged positions have their place and are valued by some investors.

XIV providers failure was that it intentionally designed to fail sooner or later. SVXY in contrast is better designed/structured in a manner that addresses the times is will lose/decline a lot quickly.

VIX is a measure of the expected variance of the S&P 500 index. If the price is expected to move around a lot, call and put options are more expensive, and so VIX tracks that and goes up.

What happened is this: a bunch of people realized that the actual volatility is generally lower than what people expect, so there's a bunch of "free" money to be made shorting volatility. So billions of dollars ended up flowing in to inverse VIX products, which sold a bunch of options on the S&P 500, making it cheaper to hedge against future price moves.

One structural problem with this trade is that when VIX goes up, the inverse VIX funds go down in value, causing them to buy back the options contracts they wrote short in order to manage their exposure to further VIX increases. This blew up one of the inverse VIX funds - it had a value of $99 on February 5th, and a value of $7.35 on February 6th.

This is not right.

Inverse VIX products (even long VIX products) don't operate in option market of S&P500. They operate in VIX futures (symbol VX) market.
They try to maintain 30 day constant maturity of VX futures. So they constantly buying and selling front month and second month VX futures

Ack, thanks for the correction. They wrote short futures contract on VIX, which can be pretty well hedged by writing various puts and calls on the S&P 500. I remembered the overall macro effect (puts and calls get underwritten on S&P 500) but dropped the exact mechanism.

VIX is simply a gambling device. Like Bitcoin, it has nothing produced from it, no dividends, no real redeeming qualities whatsoever.

Treasury bills are like buying a farm and leaving the land idle. Nothing produced from it, might rise in value with inflation when the interest rate is considered, but often having such 'gains' taxed. No redeeming qualities whatsoever. Gold is similar, but pays no interest/dividends.

Stocks often have the firms borrowing to invest/expand their business (have debts) - they're often leveraged. Borrow money to buy into a 3x long stock position and you can see great gains or losses over short periods of time. Simply a gambling device.

Used sensibly and stocks are more like buying a farm and working the land to yield dividends. Combining stocks with some bonds in effect de-leverages the leverage typically inherent within stocks.

Many 'investment' assets can be used unwisely to in effect be pure gambles, and many gambles can be used wisely to be comparable to investing. Whether a play is a gamble or a investment is purely down to the individual.

VIX is simply a gambling device. Like Bitcoin, it has nothing produced from it, no dividends, no real redeeming qualities whatsoever.

Treasury bills are like buying a farm and leaving the land idle. Nothing produced from it, might rise in value with inflation when the interest rate is considered, but often having such 'gains' taxed. No redeeming qualities whatsoever. Gold is similar, but pays no interest/dividends.

Stocks often have the firms borrowing to invest/expand their business (have debts) - they're often leveraged. Borrow money to buy into a 3x long stock position and you can see great gains or losses over short periods of time. Simply a gambling device.

Used sensibly and stocks are more like buying a farm and working the land to yield dividends. Combining stocks with some bonds in effect de-leverages the leverage typically inherent within stocks.

Many 'investment' assets can be used unwisely to in effect be pure gambles, and many gambles can be used wisely to be comparable to investing. Whether a play is a gamble or a investment is purely down to the individual.

+1

Who are we to say, it is gambling or investing? If I speculate on Corn futures, is it gambling since I am not a farmer? It did provide utility to farmer because he can hedge effectively. It also provided me some marginal utility giving me some diversification benefit.

"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

I have been far too busy trading on both ZMBE which represents the inverse probability of a zombie apocalypse damaging enough physical road infrastructure to lower worldwide automobile sales by more than 50% as well as BNNA which tracks banana commodity futures offset by the combined short pressure on publicly traded companies who actively use bananas in saleable fruit smoothies.
So I have no idea what VIX is..........good luck with it, sounds complicated!

VIX is the CBOE Volatility Index. The CBOE is one of the major options exchanges. There are also ETFs and ETNs that track it.

It is a measure of implied volatility. Implied volatility is the volatility that would make current options prices rational. So if an at-the-money call option three months out on SPY is priced at $5, that implies a lower level of volatility than if it were priced at $10 per contract. Since call options expire worthless if the market doesn't exceed the strike price, the call option has a value based on the probability it will exceed the strike price and by how much it might exceed it. A higher option premium (the price paid for the right to buy or sell at a given price in the future) indicates that traders think it is likely that the price will fluctuate.

When stock prices started fluctuating, the options traders on the CBOE started demanding more of a premium to write a call option because they tend to interpret fluctuating prices today as indicative of fluctuating prices over the coming months. Those traders who are right about what events mean for future volatility will tend to be profitable and over time, the market will be dominated by traders who are good at guessing what future volatility will be.

The VIX and generally implied forward volatility is preferred over historical realized volatility as a measurement in some cases because it's forward looking rather than backward looking.

In this case, the VIX increased so much, that an inverse ETN, XIV, would have gone to zero. In their defense, the prospectus straight up said "The long term expected value of your ETNs is zero. If you hold your ETNs as a long-term investment, it is likely you will lose all or a substantial portion of your investment." There is some 80% threshold that may mean the shutdown ETN will pay out 20% of its previous day value.

Generally these things exist because there is a market for it and a chance for CBOE and brokers to make money from facilitating it. Then there are people who make money by playing the market, e.g. by using the derivative to hedge some other position they took, trading the chance of a big gain for a more predictable small gain. Then the Dow drops 1k in a single day, Cramer says that margin clerks told him that hedge funds were caught with their pants down with massive leveraged short positions and were forced to sell great stocks, and that becomes the narrative. People like narratives.

Here is my simple understanding of VIX, as a retail investor who watched this develop over several years from the sidelines. I am sure it is technically inaccurate in many respects.

VIX is a Volatility index created by a business professor, Robert Whaley, in 1993. It tracks the volatility of the SP500. The higher the index, the more “fear” there is that the SP500 will drop. This fear is reflected in the price of insurance to protect against a drop (ie, the cost to purchase a put option). It is a useful index that has been widely reported in the media. But VIX has one major flaw in the eyes of Wall Street; you cannot buy or sell it. VIX is like the temperature or wind speed. It is useful to know what it is, but you can’t profit directly by predicting it.

But of course, people will find a way to buy or sell anything, including the VIX. Exchanges wanted to create such a product because they could earn fees from it. Traders wanted it so they could make money off people who don’t understand it. So VIX futures were created. Now one could bet that VIX would be higher or lower in the futures. VIX futures are settled in cash because no one knows what the hell it means to deliver a VIX. It’s not the same as delivering a barrel of oil or bushel of corn, which is what futures were originally created for. A farmer needed to know when planting his seeds what price he would get in the future. So he entered into a contract called a futures contract.

But futures got boring for Wall Street. People understood what they were. So they needed to create something more exotic. So they tried futures options. Basically, put and call options on futures. Interesting combo of two different derivatives, but not confusing and exotic enough to make lots of money. Futures and futures options are massive markets, but retail investors generally stay way. Wall Street wanted a way to market VIX trading to retail investors.

So enter the ETN. ETNs sound like an ETF but is radically different. ETFs need no explanation on this forum. But I would be interested in hearing a simple explanation of an ETN. The XIV is an ETN. XIV is VIX spelled backwards. ETNs are quasi-marketed to retail investors, but are really hard to understand. ETNs are not meant to be held overnight. They are supposed to be used for day trading only. Somehow ETNs buy and sell futures in order to offer products to retail investors who do not know how to buy and sell futures, even though that would be the more cost efficient (BH) way of doing things. So you could buy or sell oil futures on an exchange, but you would also buy a ticker symbol OIL ETN that supposedly tracks the price of oil. But it doesn’t really because of all the friction costs with buying and selling futures which constantly expire. So ETNs always go down. Here is an interesting article in Barron’s about this with regard to VIX ETNs (https://www.barrons.com/articles/vix-cr ... 1382117408).

Well people realized that ETNs always go down, so why not create an inverse ETN that always goes up? So a bunch of folks thought this was like minting money. It worked for a while and more people jumped on the bandwagon. The VIX kept going abnormally low. Clearly something was not right. Somehow the ETNs were wagging the dog. People noticed this, panicked when the SP500 actually dropped for the first time in a while, resulting in a crash of the inverse VIX ETN that was supposed to always go up. That’s what went wrong (or right, depending on how you look at it).

Obviously, the story gets extremely muddled at the end as my understanding of ETNs is very limited. They are somehow unsecured debts. The question should not be what is the VIX, but rather:

1) What is XIV?
2) What is the difference between an ETF and an ETN?
3) Why do these products exist?
4) Should they exist?

Personally, I think we need to seriously question whether there is any societal value to new financial products that exist primarily to facilitate gambling.

VIX futures are settled in cash because no one knows what the hell it means to deliver a VIX. It’s not the same as delivering a barrel of oil or bushel of corn, which is what futures were originally created for. A farmer needed to know when planting his seeds what price he would get in the future. So he entered into a contract called a futures contract.

There are many cash settled futures. Famous and one of the most liquid future which settled in cash is Emini S&P500. Cash settled futures doesn't mean no one knows what the hell it means.

But futures got boring for Wall Street. People understood what they were. So they needed to create something more exotic. So they tried futures options. Basically, put and call options on futures. Interesting combo of two different derivatives, but not confusing and exotic enough to make lots of money. Futures and futures options are massive markets, but retail investors generally stay way. Wall Street wanted a way to market VIX trading to retail investors.

Future options is another hedging or speculating instrument. If lumbar future go limit up or down for several days or weeks (which has happened), one who sold short/long future can loose lot more than these XIV traders. Future options mitigate that situation.

"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

Only thing I have learned is that as a group: 1. We are really bright and well read and 2. None of us seem to be good teachers.

So true. Here is how it was explained to me.

If the S&P is ~2,800, and VIX = 10....You are betting the S&P is staying within a range ~2,800 +/- 280, or between 2520 and 3020.
If you think the market will be higher or lower than the range (2,520, 3020), then you think VIX will increase. You place your bet. VIX will be higher.
If the market does not stray outside that range (2,520, 3020), and you bet VIX would be higher - YOU LOSE.....A LOT!

This is dramatically simplified, but it was the only way I could wrap my head around it. Ain't no way I am messing with that stuff (VIX).

“If you don't know, the thing to do is not to get scared, but to learn.”

VIX futures are settled in cash because no one knows what the hell it means to deliver a VIX. It’s not the same as delivering a barrel of oil or bushel of corn, which is what futures were originally created for. A farmer needed to know when planting his seeds what price he would get in the future. So he entered into a contract called a futures contract.

There are many cash settled futures. Famous and one of the most liquid future which settled in cash is Emini S&P500. Cash settled futures doesn't mean no one knows what the hell it means.

But futures got boring for Wall Street. People understood what they were. So they needed to create something more exotic. So they tried futures options. Basically, put and call options on futures. Interesting combo of two different derivatives, but not confusing and exotic enough to make lots of money. Futures and futures options are massive markets, but retail investors generally stay way. Wall Street wanted a way to market VIX trading to retail investors.

Future options is another hedging or speculating instrument. If lumbar future go limit up or down for several days or weeks (which has happened), one who sold short/long future can loose lot more than these XIV traders. Future options mitigate that situation.

Long_gamma,
Thank you for the corrections. Can you explain the XIV, and ETNs in general? Why are ETNs considered unsecured debt?

Personally, I think we need to seriously question whether there is any societal value to new financial products that exist primarily to facilitate gambling.

Average stocks are what, 1.7 debt to equity ratio (ballpark guess). Leveraged. Markets offer/enable access to such leveraged products to the retail market, some of that retail market will use that to gamble. Personally I'd rather have access to that retail market and accept that some will lose their shirts, than having regulations that prohibit retail access and perhaps only having access via counter-parties who are permitted access.

Should we ban the retail sale/use of all kitchen knives because some use them inappropriately. Make it so that if we want to cut anything we have to go to a approved agent who is licensed.

I'll admit to not reading all previous posts, but thought I'd add an emphasis that I didn't see kicked around much yet. I think OP is trying to understand more about what happened & why...just a point of clarification, the VIX still "is" (not "was")...the market gyrations had to do with products developed around the VIX more than the VIX itself.

I'm not sure I could give a detailed explanation of what an ETN is, nor do I think that is really needed here. To me, an ETN is a debt instrument. Whether it always is or not, I see it as largely unsecured debt from an issuer. The note will explain the conditions in which the debt will be handled. In the case of the ETN XIV, that is/was quite complicated. As I understand it, most (if not all) ETNs are structured to one day go away (just like debt like bonds....they have payment terms, maturity etc).

Much of the legit use of VIX & XIV & other things mentioned above has to do with managing risk, especially by institutional investors handling other peoples money. Think of it as insurance that might either reduce return or help in times of trouble (home insurance is an 'unnecessary' cost until you need to file a claim).

So, the ETN XIV (& other products also) was developed & became popular (from good or bad motives). So much so, that the issuer didn't want to bear the full risk of the debt represented. So, it got others to take on some of that. And indeed things started going bad. & the combination of what they had to do to meet their contractual obligations, the sheer size etc had a snowball effect.

Getting lost in the details & mechanics may not be as productive as stepping back & thinking about bigger lessons. One, don't buy what you don't know. I personally don't see the need to outlaw everything I don't understand & indeed I'd add that most "investors" don't 100% know most of what is invested in. Two, some products may have some good, legit specific needs -- yet others will buy them to make a quick buck & get burned. Three, even if you don't buy these products, they can have short term impacts that can disrupt markets, but hopefully don't create longer term problems

Getting lost in the details & mechanics may not be as productive as stepping back & thinking about bigger lessons. One, don't buy what you don't know. I personally don't see the need to outlaw everything I don't understand & indeed I'd add that most "investors" don't 100% know most of what is invested in. Two, some products may have some good, legit specific needs -- yet others will buy them to make a quick buck & get burned. Three, even if you don't buy these products, they can have short term impacts that can disrupt markets, but hopefully don't create longer term problems

Agree entirely that regulation is not necessarily the best solution. The best solution is for retail investors to stay away from products they don’t understand. But what we also learned from the 2008 crisis is that even sophisticated managers buy things they don’t understand (synthetic CDOs) and not always to hedge risk, and when things blow up, we ALL bear the consequences. There does seem to be a pattern though. Derivatives + retail money = financial destruction.

Trying to gamble on the VIX with the expectation that vol will stay sane by purchasing in an inverse ETF that essentially (not mechanically though) shorts the VIX is dumb when the VIX is under 10. How could it go any lower, all risk and no reward as far as I can tell. Some hedge fund just lost a lot of naive wealthy people a lot of money. Am I missing something?

Treasury bills are like buying a farm and leaving the land idle. Nothing produced from it, might rise in value with inflation when the interest rate is considered, but often having such 'gains' taxed. No redeeming qualities whatsoever. Gold is similar, but pays no interest/dividends.

Treasury bills have no redeeming qualities? Sure they do. Maybe you're thinking of cash under the mattress?

I've never seen treasuries and gold mentioned in the same breath before. Not like that.

Just for the record, I went to my Oxford English Dictionary, second edition, to check. The unabridged one with 20 volumes that takes up 4.5 feet of shelf space. I keep it around for pressing emergencies such as this.

Sorry, no "volility" there. However there is volentine, (vilentyne) which this being February 14, I thought I would bring up. And it is derived from volatile, so has some tangential relation to this thread, however tenuous. Alas, if it relates to today's holiday, it is a stretch, as it means birds or fowls. First known use circa 1380, He made him murie al pilke day, For vilentyne he fond ynow on ruyer and on lake.